How Much Deposit Do I Need for a Home Loan?

Traditionally you need at least a 20 per cent deposit to get a home loan. However, the amount you need to save is dependent on the loan to value ratio (LVR). LVR is the loan amount divided by the value of the property. For example, if you’re looking at a property with a purchase price of $200,000. If you have a deposit of $40,000, your LVR is 80% (160k/200k).

Can I Secure a Loan Without a Deposit?

If you don’t have a 20 per cent deposit, you will generally be required to pay for lenders mortgage insurance (LMI). Lenders mortgage insurance provides protection to the lending institution in the event that you default on your home loan. it is a one-off charge that gets included in your loan amount or is required to be paid upfront.

A guarantor can also volunteer their home equity as security for your loan. In the event that you default on your loan, your guarantor would wear the responsibility of paying off the loan.

What Is Stamp Duty?

Stamp duty is a charge which is applied by state governments in Australia  on transactions relating to the transfer of land or property. It is paid upfront and needs to be budgeted for in addition to your loan deposit. The amount of stamp duty you are required to pay differs in each state

What’s the Simple Way to Increase My Borrowing Capacity?

The key to increasing your borrowing capacity is to reduce your debt. One of the easiest ways to achieve this is to lower your credit card balance, reducing the perceived risk to lenders.

What Are the Extra Costs of Buying a Home?

When taking out a mortgage, many people forget to consider the fees and expenses that come on top of the purchase price of the property. 

Here are some of the extra costs that you’ll need to consider when you take out a home loan.

Home Loan Application Fees

Most lenders charge a home loan application fee. The fee will depend on the loan you are applying for and the lender. 

Home loan application fees cover:

• loan contracts 
• property title checks
• credit checks
• attending a settlement.

Mortgage Fees and Costs

• Mortgage establishment fees – lenders generally charge a mortgage establishment fee, which is a fee for setting up a mortgage.
• Property valuation fee – a third party chosen by the lender, is appointed to determine the value of your land and improvements.
• Mortgage registration – your mortgage deed needs to be registered with the government. Some State Governments charge stamp duty to register your mortgage.
• Lenders Mortgage Insurance – if you don’t have 20% of the purchase price or the value of the property, the lender will require you to pay for a lenders mortgage insurance policy that covers their risk in the event you default on your repayments.

Property Fees and Cost

• Building, pest and electrical inspection fees – it’s wise to have your property inspected for any structural or electrical problems and for pests. 
• Registration of transfer fee – the new owner of the property needs to be registered at the land titles office.
• Legal fees – you generally need to pay a solicitor or settlement agent to handle the transfer of ownership of the property on your behalf.
• Home and contents insurance – most homeowners insure their home and contents against a range of threats, such as burglary, fire, storm, etc. Lenders insist that your property is insured while you have a mortgage.
• Life and income protection insurance – borrowers should consider protecting their incomes and themselves while they have a mortgage.
• Utility costs – connecting electricity, gas and telephone can attract a fee.
• Council rates – your local council charges rates to cover garbage collection and a host of other services.
• Water rates – the water corporation charges rates for the supply and upkeep of water to your property.
• Strata / body corporate fees – if you buy an apartment or strata titled property, body corporate fees are charged, and some fees can be significant, particularly if the building is in need of a major work, or if there are lifts, pools and other communal facilities.
• Maintenance costs – don’t forget to make provision for regular maintenance on your home, even if you decide not to undertake significant renovation.

What is Lenders Mortgage Insurance (LMI)?

Lenders mortgage insurance (LMI) is required when the value of a loan is more than 80% of a property’s purchase price, or property valuation if refinancing. In very basic terms, a lender considers a loan to carry a higher risk if the Loan to Value Ratio (LVR) is above 80%, in which case LMI is payable.

Not to be confused with mortgage protection insurance, which is designed to protect the borrower, LMI covers the lender’s risk within a residential mortgage transaction in case the borrower fails to make loan repayments. LMI is a fairly common practice within the industry, particularly for first home buyers who may struggle to save a 20% deposit. 

Even though the actual property acts as security for the mortgage, the nature of the property market, like any investment class, means there is a chance that its value declines. This could result in a financial loss for the lender if the borrower is unable to repay the loan and the property is sold at a price below the value of the loan.

The cost of the LMI premium is dependent on several factors, such as the loan size and property value. Most insurers are flexible when it comes to the method of payment of LMI, it can either be a one-off upfront premium payment, or a premium could be included in the overall cost of the loan and included in the regular repayments. 

It is not transferable, which means a new loan, for example if the borrower refinances the loan, may require a new LMI premium depending on how much equity the borrower has in the property.

What’s in It for Me?

While LMI protects the interests of the lender, there is value to borrowers in paying the LMI premium. 

Opting for LMI means it allows a borrower to independently purchase a property sooner than they otherwise might. LMI is the alternative to using a guarantor or having to save for a bigger deposit, both of which are not feasible options for many first home buyers.

A deposit of at least 20% of the desired loan amount is required for a borrower to not be deemed ‘high-risk’. For many buyers it is difficult to save this amount, LMI allows those borrowers with smaller deposits to enter the market sooner rather than later.

The major benefit of LMI is that it can allow the dream of homeownership to become a reality for a lot of first home buyers. 

How Can I Avoid Paying LMI?

Depending on your circumstances, you could save for a higher deposit – a higher deposit means a smaller loan amount and therefore a lower LVR thereby reducing the lender’s risk. A loan of 80% or less of the property’s value is the key to avoiding paying LMI.

If you don’t have the financial capacity to meet a 20% deposit but still want to avoid LMI, you do have the option of getting a guarantor for your loan. A close relative, such as a parent, sibling or perhaps a grandparent, may be eligible to act as a guarantor, and they use the equity in their property to help you secure yours and keep your total loan below 80%. However, it’s important to remember that acting as a guarantor does come with some risks too.

The major benefit of LMI is that it allows the dream of homeownership to become a reality for a lot of first home buyers.